Note: This article is courtesy of Iris.xyz
By Brendan Furey and Michael Conlon
The following questions were raised to us about the new DOL Fiduciary Rule.
1. In RIA with Rollover, since AUM increases, but fees decrease or services increase then are you a conflict? Trusted advisor is increasing income, but client getting something for it.
A: This question seems to be asking when an Advisor is managing a client’s retirement plan assets and recommends a rollover to another vehicle, such as an IRA, since the Advisor’s assets under management (AUM) will increase but overall fees paid by the client will decrease, or services received by the client increase, then are you in a conflict? The Advisor’s compensation is increasing but the client getting something for it.
The recommendation of a rollover creates a potential for a conflict of interest. Therefore, the Advisor making the recommendation should document with the client why the rollover is in the client’s best interest. The fact that overall fees paid by the client will decrease, or services received by the client will increase with the rollover are good reason why the rollover is in the client’s best interest and therefore, should documented in the client’s profile and if it is not already in the client agreement, the client should receive notice that the Advisor is a fiduciary acting in the client’s best interest.
The definition goes on to explain what constitutes a “recommendation” and what may be excluded from that definition, such as providing certain services or information regarding the plan or IRA, such as marketing or making available to a plan fiduciary a platform or similar mechanism where the plan fiduciary may select or monitor investment alternatives; identifying investment alternatives that meet objective criteria specified by the plan fiduciary; providing objective financial data and comparisons with independent benchmarks to the plan fiduciary.
2. If an Advisor recommends that a client rollover from a 401(k), hence increasing the Advisor’s AUM and the client’s fees (regardless of investment), does not that create a conflict of interest?
A: Correct, the recommendation of a rollover creates a potential for a conflict of interest. Therefore the Advisor making the recommendation should document why the rollover is in the client’s best interest.
3. How do you get the expenses of the 401(k) that the employee was paying?
A: Clients should be able to produce documentation regarding the expenses that they are currently paying for their 401(k) plan. The Advisor will want to collect the current fee structure of their client’s 401(k) plan as a factor in making an informed recommendation about why any rollover from that plan is in the client’s best interest.
4. How do we get the expenses of the 401(k) to the client?
A: If you are trying to obtain information about a client’s 401(k) you should contact the plan sponsor. However, this question seems to be asking how do Advisors ensure they are not responsible for the expenses of a client’s 401(k).
Unless an Advisor is engaging clients in a “wrap fee” program, where the client pays a single advisory fee for the management and services of their account including custodian and brokerage fees, then the clients should be responsible for paying expenses related to the management of their account. Advisors should ensure that their client agreements and Form ADV Part 2A, Item 5(C) fully and accurately disclose which party is responsible for fees related to the account management.